By TIOL News Service

CHENNAI, JAN 29, 2014: THE issues before the Bench are - Whether when unremitted export sales was excluded from the export turnover, the same should also have been excluded from the total turnover while computing deduction u/s 10A; Whether parity must be maintained between the numerator and denominator for computing deduction u/s 10A, although the assessee has sought an extension from RBI for receiving the exports proceeds; Whether unrealized export sales can be considered as business loss merely on the score of the amount not having been realized in the particular year and Whether further such unrealized sales from export can be claimed as business loss and considered for computing deduction u/s 10A, although it was written off only against share premium account through a shareholders resolution passed after the completion of the assessment order. And the verdict favours the Revenue.

Facts of the case

The assessee, a public limited company is carrying on business in software development, hardware sales and education and training. It exports software from its Software Technology Park (STP Units). In respect of claim of deduction u/s 10A to the tune of Rs.1,32,18,47,053/- the AO pointed out that out of the total turnover of Rs.205,14,65,831/-, a sum of Rs.70,10,93,076/- had been brought into India upto 31.03.2002 by way of foreign exchange and the balance of Rs.135,03,72,755/- was yet to be received within the time frame given u/s 10A. The assessee claimed net loss of Rs.66,59,04,421/- on the domestic and other exports which did not fall for consideration u/s 10A. The assessee had sought an extension of time from RBI for receiving the remaining portion of the export proceeds. The AO pointed out that adjustment made in the profit and loss account included the exemption claimed u/s 10A to the tune of Rs.1,32,18,47,053/- and restricted the export turnover eligible for deduction u/s 10A to Rs.70,10,93,076/-.

In the meantime, a special resolution was passed by the shareholders of the assessee for utilizing the share premium account in terms of Section 78(1) read with Section 100 of the Companies Act, 1956 for adjustments towards goodwill and erosion in the value of investments including subsidiaries, inoperative fixed assets current asset's debit balance in the Balance Sheet of the Company as on 31.03.2003. The unremitted sale proceeds was also adjusted against likewise and the approval from the High Court was duly obtained for this arrangement vide order dated 28.06.2004. Before the CIT(A), the assessee sought for credit of such write back as by way of deduction from the taxable income attributable to 'unrealized sales. However, this contention was rejected. On further appeal, the Tribunal referred to the resolution passed by the assessee and held that the liability not having crystallized during the year under consideration, the claim for deduction on 'unrealized sales' did not arise.

Still aggrieved, the assessee has filed this appeal before the High Court.

The counsel of the assessee argued that the unrealized sales of Rs 135,03,72,755/- should have been excluded from the total turnover for computation of the deduction as the numerator and denominator should be at parity. She argued that something which was not receivable should not have been included in the total turnover and for this the counsel heavily relied upon CIRCULAR NO.794 of 2000. She also argued that once the unrealized sales were adjusted in the share premium account as per the orders of this Court, the Department should not have rejected the deduction ignoring the Company petition before the High Court.

The Departmental Representative contended that initially the assessee did not raise any objection of excluding the unrealized sales in the computation of the total turnover before the CIT(A) and even the assessment order made no reference to the so called business loss claimed by the assessee. It was submitted that this ground was raised only as an additional ground of appeal before the CIT(A), that too on the consequent order passed by the Company Court. Therefore, he argued that it was no more open to the assessee to raise this objection which was not before the AO. Further, the DR submitted that the amount of unrealized sales was merely written off against the share premium account and as long as the same was not written off bad debts or unless the position as a loss had been approved in the year under consideration, the question of considering the same as business loss did not arise. Further the DR submitted that if parity has to be maintained between total turnover and the export turnover, then the very object of Section 10A of the Act would be nullified.

Having heard the parties, the High Court held that,

+ going by the facts thus prevailing as on the date of filing of the return as well as on the date of passing of assessment order dated 31.03.2004, it is evident that the assessee never had the idea of offering 135,03,72,755/- as business loss. The one and only question that was considered by the Assessing Officer was as regards the working of the exemption under Section 10A of the Act by adopting formula by applying Sub Section 4 of Section 10A of the Income Tax Act, 1961……………Until the time of assessment, there was nothing to show that it had received the said amount. Thus, rightly, in calculating the proportion amount on the exemption available, the Assessing Officer excluded what was not received as by way of foreign exchange to fall under the export turnover, but included this as forming part of the total turnover viz., a sum of Rs.135,03,72,755/-…………….;

+ in any event, going by the resolution made for adjusting the amount from out of the Companies Security Premium amount as on 31.03.2004 and what had been made in the Company Application (order dated 28.06.2004) the same could have no relevance at all as far as the present assessment year is concerned, since, as on that date i.e., on the date of assessment order passed, there was no such claim that the unrealized amount had become bad debt or a business loss;

+ even as an alternative argument, we do not agree with the assessee's contention that 10A exemption merits to be considered on the lines projected by the assessee viz., parity between the export turnover and the total turnover. As rightly pointed out by Standing Counsel appearing for the Revenue, if the proportion is worked out as contended by the assessee, the result would certainly give a distorted figure which would be contrary to the intent of the provision. As rightly pointed out by Standing counsel appearing for the Revenue, when the so called loss has not crystallized as a business loss during the year under consideration, merely on the score of the amount not having been realized, one cannot allow the loss as business loss. The assessee's contention before the Assessing Officer was that in respect of the said amount, they sought permission from Reserve Bank of India for extension of time for remitting the said amount. In the face of the facts pleaded, the Assessing Officer rejected the same stating that the assessee's case could not be accepted for the grant of relief. Accordingly, the Tax Case (Appeal) stands dismissed. The order of the Income Tax Appellate Tribunal is confirmed.

(See 2014-TIOL-113-HC-MAD-IT)